Credit by Trial and Error : A Mountain of Bad Debt Menaces Mexico's Shift to a Free-Market Economy

CANCUN, Mexico — Rosa Maria Mendez understands far more about the bad-loan portfolio of Mexican banks than she ever wanted to. The 39-year-old housewife and former secretary is, reluctantly, part of the problem.

She has not made a mortgage payment on her two-bedroom condominium in the three years she has lived in a housing project on the outskirts of this beach resort. Mendez and the other 360 families in the complex are refusing to pay until their homes are completed correctly by a problematic contractor.

They are the human face of a worsening crisis in Mexico's fast-expanding banking industry. Even as the banks brace for the foreign competition to come with the lowering of trade barriers, they have seen their proportion of bad loans mount to as much as 14% nationwide.

The surge in sour loans threatens the stability of the recently privatized banking system and could trigger a wave of insolvency comparable to the savings and loan crisis in the United States in the late 1980s.

Mendez and her taxi driver husband wistfully recall the handsome scale model that prompted them to scrape up $30,000 for their down payment in 1991. "It was so beautiful, with open areas and even hanging gardens," she said during a recent interview in her modest, tile-floored living room. "Why, you would have thought we were going to be living in the hotel zone!"

The reality of three-story concrete buildings with three condominiums to a floor has been quite different. Weeds grow between the buildings and mud puddles fill the unpaved streets and parking lots. Water pipes and drainage are shared among nine neighbors; if someone leaves a water heater lit, everyone's water heats to boiling.

Mendez and her neighbors are unhappy with their houses. The builder is on the brink of bankruptcy and the bank is stuck with bad loans. So it goes as Mexico is dragged and prodded toward a free-market economy.

The principles in the Mendezes' troubled housing venture are caught in a web of good intentions gone awry: bank efforts to provide badly needed consumer credit, government attempts to deliver on promises of housing for low-income workers, a builder's eagerness to make a place for himself in the country's new entrepreneurial environment and public pressure to do it all quickly.

Unfortunately, nobody was ready.

Part of the problem, says Roberto Hernandez, chairman of the Mexican Bankers Assn., is the economic downturn that has cost many borrowers their jobs. But the backdrop, he says, is Mexico's lack of a "credit culture." The need to maintain a good credit rating is a new concept to most borrowers.

In addition, government-owned banks--the only kind Mexico had until privatization began in 1991--did not have senior credit officers or even acknowledge the need for a person who could independently judge whether to grant a loan.

Bad loans were often simply forgiven. Mortgages for low-income families were almost sure to be losses: Decades of high inflation had resulted in high interest rates, so a worker's monthly mortgage payment often did not even cover the interest, much less touch the principal. At the end of the loan term, people faced huge balloon payments, and banks routinely wrote them off.

"The government did not seriously try to collect," said Jose Burillo, executive director of the Southeastern Region for Grupo Financiera Serfin, a major financial holding company. "When we took over (from the government), we could not even send people their statements. Those who wanted to pay, paid. Those who did not, did not."

That atmosphere set the stage, and conflicting pressures unleashed by the free-market reforms of President Carlos Salinas de Gortari created the problems Mendez and her neighbors are confronting today.

Four years ago, the Gulf Coast city of Cancun faced a serious housing shortage caused by the success of the government's subsidizing investment in tourism, a key component of a strategy to attract foreign money.

Dozens of high-rise hotels sprang up on the beach, and Mexicans poured in from across the country to make the hotel beds, carry the guests' suitcases, drive taxis and wait tables. Unable to find housing, they lived in shacks in a nearby swamp--bad for the environment and disastrous for Cancun's image as a world-class resort.

That put Cancun near the head of the list of places in need of low-income housing projects, which the government turned over to banks and private developers. The banks, still government-owned, were under pressure to lend money.

Eager buyers moved in before the project was finished, but banker Burillo says Fernandez overextended himself. Work stopped six months ago, and he hasn't made a payment on his bridge loan in a year, the bank says.

The contractor, unavailable for comment, is negotiating with Serfin. Meanwhile, the bank is restructuring the mortgages. The bank has offered to stretch out the original 20-year loans to 30 years. Some owners assume their loans will be written off, as usual. For her part, Mendez is wary of the offer, which doesn't stipulate the interest rate.

"We are not going to let them trick us again," she said.

Bad Loans Rising

Non-performing loans as a percentage of total loans granted by Mexican banks, by quarter: